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Failure University

(Published in Jerusalem Report, August 26, 2013)

Shlomo Maital

The impact Startup Nation, Dan Senor and Saul Singer’s best-seller about Israeli entrepreneurs, has had on Israel’s image all over the world is enormous. More than seven million copies have been sold. Technion President Peretz Lavie reports there is now an endless, blessed stream of visitors from all over the world coming to Technion, where Israel’s high-tech industry was born in Professor Yitzhak Kidron’s Microelectronics Lab.

I am fortunate to meet and greet many of those visitors. Scholars, ambassadors, professors, students, they all want to know one thing ‒ the recipe for cooking up their own startup nation. They want to know the secret sauce that generates armies of intrepid creative entrepreneurs who build wealth, employment and growth. I tell them stories about legendary entrepreneurs, like the late Efi Arazi (The Jerusalem Report, May 7). But as a management educator and innovation researcher for the past 46 years, I have learned that defining the one key startup ingredient ‒ the yeast that makes startup bread rise ‒ is elusive.

Perhaps, after an email chat with 58-year-old serial entrepreneur Dov Moran, I am a bit closer to finding the answer. The secret sauce is dealing with failure. Writing in the business daily The Marker, Inbal Orpaz recently observed, “Every few years Israel's tech sector has a "big bang," in which an important company disintegrates and its employees, founders and executives scatter in all directions. For the founders and investors it's a nasty shock, while for the employees who are rudely thrust back into the job market it means beginning a new chapter in their lives. Sometimes the trauma ends up being of immense value to the entrepreneurial environment.” The failure of Modu is just such a Big Bang. At 12 noon on a chilly November day in 2010, Moran left the offices of Modu, a company he founded that made the world’s lightest modular touchscreen mobile phone, a tiny three-inch marvel, an early smartphone. Modu was broke. Its attempt to raise money by selling shares had failed. Apple’s iPhone had proved too tough a competitor. Some 120 talented workers were unemployed. “Good night, Modu,” wrote a blogger, “we’ll always remember you as the audacious underdog who had the brass to tell Nokia to say their prayers.” Moran later sold Modu’s key patents to Google and paid off his creditors. At 12:30 p.m. Moran walked to the nearby offices of his next startup, Comigo, where a handful of Modu veterans were launching a new change-the-world idea. Moran had been unemployed for 30 minutes. And he was already at work, scheming about how his new idea would create new value for people everywhere. Far from being deterred by Modu’s failure, Moran’s “alums” competed fiercely for the right to join his new venture. (Comigo is developing smart set-top boxes that link TV with smartphones). Moran was very wealthy from an earlier exit. His company M-Systems invented the memory stick, also known as thumb drive or ‘disk-on-key’, and was acquired by global giant SanDisk for $1.6 b. in January 2007. He didn’t need to put in the 20-hour days that startups require. But for Moran, like many Israeli entrepreneurs, it is not about the money. It is about the challenge of doing things others say are impossible, to change the world for the better. Everyone knew no Israeli company can succeed in mass-market consumer electronics. That did not stop Moran from launching Modu. When you tackle the near-impossible, you often fail, as Moran did with Modu. But entrepreneurs regard failure not as a graveyard, not an end but a beginning, a school where you learn bitter lessons, make mistakes, and avoid them in future. Failure, for Moran and other entrepreneurs, is a university. And, I have to admit, Technion, where Moran studied electrical engineering and graduated in 1977, and the other Israeli universities, too, give entrepreneurs a stellar education, but Failure University is where the cold steel of will and resolve is tempered. Resilience in the face of failure is, I believe, the ‘secret sauce’, one that drives both Israeli and American entrepreneurs. It is widely known that in Silicon Valley, when entrepreneurs ‘pitch’ to venture capitalists, a track record of three failures is far more attractive to investors than a clean track record without them. In speaking to entrepreneurs in Israel and abroad, I use the events to do some research. I often give them a list of a dozen factors thought to drive entrepreneurial innovation and ask them to assign points to each, reflecting their importance. Among Israeli entrepreneurs, the top two are resilience, the ability to recover from misfortune and failure, which heads the list; and stubborn persistence, a close second. Among Chinese entrepreneurs, by far the dominant driver is ‘desire for wealth’. Resilience is an also-ran. (Desire for wealth is a distant sixth among Israelis).

Today everyone talks about the “cloud”, the system of distributed computing running on computers linked by a network. But there is another cloud ‒ the cloud of new startups that emerge from old failed ones. The Marker recently ran a graphic showing 15 such startups that emerged from the failed Modu’s employees and managers. Moran himself is running one of them, Comigo, as CEO, and has invested in others. They have names like Flayvr, Loopjoy, Vidmind, Onavo, GrabIt, Triapodi, Minit, and some, like Gammado, are headed by women. I saw another such cloud in the office of Yehuda Zisapel, legendary founder and President of RAD group. On the wall of his office is a chart with some 80 startups, all born directly or indirectly from the womb of the ‘mother ship’ RAD, shown at the center. The RAD ‘cloud’ has concentric circles, with the outer startups launched from those in the inner ring, like ripples in a pond. Yehuda and his brother Zohar started RAD, an early high-tech pioneer specializing in low-cost modems, with fierce single-minded focus. When a worker had an innovative idea not in Rad’s core business, Zisapel encouraged him or her to leave and start a new business. Zisapel provided investment funds for some, mentoring for others. I’m now studying this amazing cloud of companies, many of which are located not far from RAD’s offices on Wallenberg St. in Ramat HaHayal, a northern Tel Aviv suburb. The RAD cloud is not a result of failure; but it is an ecosystem driven by a key mentor, Yehuda Zisapel, like Moran low-key and soft-spoken, who inspires those around him to innovate. Another instance of Failure U. was recounted by current Minister of Economy, Trade and Industry Naftali Bennett. Last year, he told Technion students how he was informed, while on vacation with his family in France, that a competitor had beaten his startup, Cyota, to market, with pioneering software. Instead of accepting defeat, Bennett and his team quickly changed direction, developed successful anti-fraud software and then sold Cyota to RSA Security in 2005 for $145 m. Moran’s company M-Systems was acquired by SanDisk, founded by Israeli-born entrepreneur Eli Harari. Harari too is a graduate of Failure U. Harari told interviewers from the Computer History Museum that at age 43, he was kicked out of Waferscale, a company he founded three years earlier, after a dispute with its Board. “It was an unmitigated disaster,” Harari recalls. “I was an also-ran.” Harari then went on to found and build SanDisk into the global leader in flash memory cards, with just-announced second-quarter revenue of $1.5 b. and net income of $262 m. Here is what I learned from Dov Moran about failure, leadership, resilience, mentoring, and what drives the legions of Israeli entrepreneurs. He prepared the answers to my email queries during a long flight to Tokyo. He flew Economy, a chance, he says, “to speak with his Comigo workers”, crammed into a narrow seat to show deep respect for investors’ money when he could afford to buy the whole airplane. On startup DNA: “What was different at M-Systems and Modu was the DNA of innovation ‒ the constant desire to innovate, to talk about it with all the employees, to be excited by it, to let people raise all kinds of strange ideas and respect them for it even if the company can’t implement them all. It is the understanding that many of the ideas will fail, but it is OK. It is the understanding that innovation is not just related to the product but to everything we do, hiring, finding partners, presenting at trade fairs. It is the crazy belief we can do everything. Even compete with Microsoft and Apple. Most important, we strived to bring value, not profits. If you create value for your end customers and your partners, the company will prosper. If the CEO acts thus, it penetrates the deepest parts of the company.” On emerging from failure and mentoring: I asked him, “why did the group from Modu want to work with you again?” “You need to ask them,” he said. “What they told me was, they enjoyed working with me, so why not continue? There are active ex-Modu groups on Facebook and LinkedIn. Last week, for instance, there was a meeting of Modu alums arranged by Inbal Arieli at her new startup. I am in touch with many of my former workers, through email and Friday meetings. If I can help, I will invest my time and connections for them. Or provide them with advice…although most are smarter than me.”

That last comment brought me another insight. In startups, egos destroy far more ventures than they build. A touch of humility goes a long way – and nothing fosters humility more than a Failure U. diploma. As Eli Harari says, “It’s amazing what you can achieve if you don’t mind that somebody else gets the credit.” Dov Moran agrees.

On his dreams for future inventions: “I believe the medical world needs to move forward. Smarter medical devices, better medicine, closer monitoring. It may sound distant, but Comigo, which develops better TV/display operating systems, is tied to this vision. One of these days, we will hopefully merge the two. I hope not too far in the future.” Before entrepreneurs even approach Failure U., they often serve long apprenticeships. After graduating, Moran spent seven years developing electronics for the Israeli Navy, and another five as an industry consultant. He launched his first startup, M-Systems, in 1989, when he was 34. How did Moran get the idea for the disk-on-key? In 1988, at a New York seminar, he failed to close his laptop computer properly, the battery was depleted and he lost his entire presentation and notes just minutes before he was due to start. “I swore never again to be without backup,” he recounted, and went on to develop the USB flash drive. Many entrepreneurs invent things they themselves want and need. Often, the task is immensely difficult. Often, they fail. And often, they pick themselves up and try again. What we learn from Dov Moran and many others like him is that a diploma from Failure U. is an entry ticket to the startup Hall of Fame.